Less Foam, More Brew
Helping a beverage producer improve profits by transforming pricing and salesDOWNLOAD
Over nearly a century, this family-run beverage producer has built a portfolio of products that are available to consumers around the world. However, the company’s profits were not increasing with its growing sales volume. Like many beverage companies, their sales culture and associated compensation model was based on volume, not profits. As a result, the company’s sales representatives used pricing discounts and promotions to encourage local independent distributors to buy more of their products, without considering the parent company’s profitability.
Company leaders turned to Deloitte to help improve profits. After analyzing the company’s culture, systems and processes, Deloitte’s team recommended an integrated plan to help transform the company’s revenue-generation approach, from price-setting to sales management to cash application. The results — a 5 percent increase in profits and an estimated $155 million in near-term savings opportunities — were immediate and measurable.
The company’s long-standing sales culture and compensation programs were based on building sales volume, not profits. To compound the problem, the sales force was given broad pricing autonomy to reach its volume goals, which was typically achieved through increasing sales to local distributors. Individual sales reps offered discounted prices and promotions to their distributor customers to keep sales volumes strong, regardless of the impact on company profits.
While the company’s leaders knew that margins were eroding, they lacked the analytic and reporting capabilities to analyze and resolve the problem. They asked Deloitte to help them improve margins and profitability using sustainable, repeatable price management practices and tools. The Deloitte team launched an initial discovery phase that revealed many eye-opening facts that challenged the company’s longstanding sales and pricing practices. For example, about 40 percent of customers with special promotional support had negative margins. Analysis of the company’s retail business units showed that 25 percent of stores in one unit were not profitable. The team also identified 20 unprofitable products across the company-wide portfolio, which reduced profits by 1 percent annually.
To reach its profit goals, the company wanted to overhaul its pricing processes and policies, break down functional silos, improve management’s access to timely, correct and actionable information and transform the sales culture. The much-needed transformation touched almost every area of the organization.
The business case for the project was built on hard data, but a deep understanding of human behavior was also required to make effective recommendations for transforming the engrained corporate sales culture to improve profitability. The company also needed help developing and implementing strategies to reverse the situation, including effective pricing and sales management processes, distributing pricing information and control over pricing and discounting practices.
Sales force rewards and compensation. Sales behaviors were realigned by changing the incentives and metrics used to measure sales performance to match management’s profit goals. For example, rather than focusing primarily on sales volume, the compensation formula was modified so that 20 percent of a sales rep’s reward was based on his or her customers’ profitability.
New objective pricing model. Data-driven analytics were used to dispel management’s tendency to make pricing decisions based on limited information and anecdotal evidence. But even an objective pricing model required flexibility; management identified geographic areas where, for competitive reasons, they were willing to sacrifice an increase in local profits in the short run to maintain market share. Still, the model provided a factual knowledge base, allowing the management team to conduct discussions about the returns on longstanding and new pricing and promotion strategies.
Enterprise-wide visibility into profitability. One executive summed up leadership’s frustration with the existing reporting systems in one sentence: “I cannot manage what I cannot see.” The team created a new profitability model that spanned functional silos and brought data and insights together from across the enterprise, including breweries, distribution centers, sales and retail outlets.
Cultural shift. Data alone isn’t enough to drive lasting change. The enterprise-wide culture was also changed so that people across the organization — and particularly sales reps — gained a clear understanding of how their actions and decisions contribute directly to the profitability and sustainability of the company. This helped foster a more meaningful work environment.
Deloitte stood strong behind its recommendations. The compensation recommendation was aligned with the client’s profitability goals. Instead of a standard rate hourly fee, the Deloitte team worked for a percentage of the value that the client achieved from implementing the team’s recommendations.
The Deloitte team’s recommendations were implemented over a 14-month period. The financial results were substantial and measurable: projected profits increased by 5 percent and an estimated $155 million in near-term savings opportunities were identified.
The effectiveness of the approach more than met the company’s expectations beyond the financial returns. For example, company leaders gained broad transparency into the process of analyzing and setting prices, reducing the time required to adjust prices from a period of two-to-three months to two-to-three weeks. They also gained a sustainable platform that allowed management to view price and margin performance across multiple regions, markets and product groups, which provided timely insight that drove more informed pricing and governance decisions.
The sales force was a winner, too. Sales management and staff were given dashboards that provided real-time information about how their local pricing decisions affected profitability. This immediate performance feedback helped shape the new sales culture, helping sales reps to feel more connected to the company. Their roles expanded from just selling to managing customer relationships and contributing additional value to the bottom line.
By reshaping the company’s culture and providing the tools and processes to make informed and timely profitability and pricing decisions, Deloitte helped the company in its efforts to reposition itself for another century of sustainable growth.